Chapter 7 Indemnity

Question 1

What is the definition of “indemnity”?

Answer 1

“To put the Insured as close as possible to the same financial position after a loss as they were immediately before the incident”

Question 2

Identify two types of insurance that are benefit policies i.e. not policies of indemnity.

Answer 2

Life

Personal accident

Question 3

Identify four ways a property insurer can indemnify an insured

Answer 3

Cash
Repair
Replace
Reinstate

Question 4

What are the two ways indemnity is measured on a Marine policy?

Answer 4

Valued policy as agreed

Unvalued policy as per formula in Marine Insurance Act (1906)

Question 5

What would “indemnity’ be on property policy covering buildings?

Answer 5

Replacement cost less wear and tear

Question 6

On what basis are most buildings insured under a property policy?

Answer 6

Reinstatement basis (new for old)

Question 7

If a building is insured on a reinstatement basis what condition of average usually applies?

Answer 7

85% condition of average

Question 8

If average applies and there is a claim for £10,000 and the sum insured is £90,000 and the value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 8

£9,000 = £10,000 x £90,000/£100,000

Question 9

If a building is insured on a reinstatement basis and the 85% condition of average applies and there is a claim for £10,000 and the sum insured is £90,000 and actual reinstatement value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 9

£10,000 as the sum insured £90,000 exceeded 85% of the actual reinstatement value so average does not apply

Question 10

If a building is insured on a reinstatement basis and the 85% condition of average applies and there is a claim for £10,000 and the sum insured is £80,000 and actual reinstatement value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 10

£8,000 = £10,000 x £80,000/£100,000

Average does apply as the sum insured £80,000 is less than 85% of the actual reinstatement value

Question 11

What is the typical valuation of indemnity for manufacturer’s stock under a property policy

Answer 11

Cost of raw materials plus labour costs incurred to date

Question 12

What is the typical valuation of indemnity for wholesaler’s stock under a property policy

Answer 12

Cost of replacing stock including transport costs

Question 13

The inflation protection where by the insured declares the cost of reinstating the building at the inception date of the policy but the sum insured is the declared figure plus a specified percentage to cover inflation during the policy period and reinstatement period is called?

Answer 13

Day one

Question 14

Is property insurance on a Day 1 basis subject to 85% average?

Answer 14

No average will apply if the declared value is less than the actual reinstatement value of the building at the inception date of the policy

Question 15

What is the typical measure of indemnity on a household policy?

Answer 15

New for old

Question 16

What is the typical measure of indemnity for farming stock?

Answer 16

Market price

Question 17

What is the typical measure of indemnity on a liability insurance policy?

Answer 17

Compensation plus legal costs and expense subject to policy limit

Question 18

Identify three ways insurance policies modify the principle of indemnity

Answer 18

Agreed value policies (eg Fine Art)
First loss policies (eg Theft)
New for old/Reinstatement (eg Property)

Question 19

Identify five ways indemnity may be limited under a policy

Answer 19

Sum insured not adequate
Limit of policy not adequate
Sub limit applies
Average applies
Deductible/excess applies

Question 20

The average condition that applies when an insured has taken out two policies covering the same stock is known as?

Answer 20

Two conditions of average

Question 21

If a loss is £30,000 and there is a deductible of £5,000 each claim how much do insurers pay to the insured?

Answer 21

£25,000 (£30,000 less £5,000)